Archive for January, 2013

Note to our readers, it is likely that there will be no Option Queen Letter next week.

Thank you President Barack Obama, the tax increase seen as a payroll deduction was not a welcomed gift. This was not a high earner tax but rather a tax on all tax payers. Naturally, if you didn’t work or live from the income produced by your portfolio, you did not enjoy this increased deduction. However; those living on dividends did get a tax increase on those reportable dividends. The result of this tax increase, note it is not a “new” tax but rather an increase in taxes, will leave the average tax payer with less disposable income. You might feel that this is not a big tax bite but whatever you earned last year, you (unless you had a pay increase) will earn less this year. These dollars are taken out of the tax payers pocket and that likely puts discretionary spending on hold.

Okay so if the Congress really wants to tax the rich, close the loopholes that allows some wealthy Americans to pay lower taxes. Seriously when Warren Buffet’s secretary pays higher taxes than he does, something is amiss. We understand that he doesn’t earn income from work and she does, which is why her taxes are higher than his. So perhaps there needs to be an adjustment made in this failed system. Perhaps unearned income, as in income earned without working and income from investment, need to be taxed in a different manner. There are huge loopholes in the system and they are to fault.

We have always believed in a value added tax (VAT). That alone will not solve the problem but we will be able to tax people who never pay taxes like criminals. At this time, insomuch as much of the income that criminals earn is illegal, taxing everything will help us collect taxes on untaxed items. Another method to apply taxing to everyone earning money is to remove the criminal element by making everything legal, drugs, prostitution, gambling etc. That way the criminals are out of those very profitable businesses and the government can assess taxes on this activity. There will always be criminals but at least the government can take their “pound of flesh” on this one. The will be another benefit and that will be seen in the criminal justice system. We will be no longer stuff our jails with people who were guilty of selling drugs, now, we will tax them.

The S&P 500 did manage to squeak out a pair of fresh highs, for both the cash and the futures. The market feels heavy and although, we see no real huge downdraft looming, it needs some time for either consolidation or digestion of the recent gains. We have a huge gap on the chart from1425.75 to 1438.25. We would not be surprised to see the trade step inside that gap to test the waters. Should the bulls attack the highs and push that lip higher, we would expect to see trend following systems jump in and goose the averages even higher. The market participants seem more like lemmings than intelligent people thus once a trend appears, it is acted upon by system traders and algorithmic traders causing these exaggerations in the market.

The Gap in the VIX is 17.88 to 15.93. The VIX did make a slightly lower low, 13.22 compared to 13.30 in August of 2012. Just as the S&P 500 this seems to be a consolidation. That said, we will say that should the move in the VIX run to the downside, we would expect to see a much lower low, perhaps nearing the low levels seen in February of 2007 (9.70). As an aside, the volatility index is as oversold as the S&P is overbought…just a thought.

The US Dollar Index completed a picture perfect “M” formation this week closing the Friday session at 79.61, returning the index to that oh so familiar congestion zone. The Thursday and Friday sessions were sessions that took the US Dollar index down 1.79 points, a huge retreat! This brought the index back into the congestion zone and opened the door to 79.70 and possibly 78.60. All the indicators that we follow herein continue to issue a sell-signal. There isn’t a bend to the upside to be seen, at this moment. It should be remembered that although we are oversold we can go lower. The 5-period exponential moving average is at 80.022. The top of the Bollinger band is at 80.711 and the lower edge is seen at 79.030. We are below the Ichimoku Clouds for the daily time-frame, in the clouds for the weekly time-frame and below the clouds for the monthly time-frame. The 0.5% by 3 box daily point and figure chart shows an index that has traded in a congestion area with downside risk. The 60 minute 0.05 by 3 box chart shows us that the downside thrust is a dangerous one. We closed the session at the lower end of the range of the day and very close to the downside single print area 79.47.

The S&P 500 opened higher and closed the Friday trading session about mid-range for the day but did leave a red candlestick on the chart. Yes, we made a higher high but it looks like one made without conviction. We are overbought as measured by the stochastic indicator and the Thomas DeMark Expert indicator. Our own indicator is midland to flat on the positive side of neutral and the RSI is almost at the overbought level. The stochastic indicator is the only indicator that seems to be almost ready to issue a sell-signal. It is pretty iffy at this time. We are above the Ichimoku Clouds for the daily, weekly and monthly time-frames. The 5-period exponential moving average is at 1460.07. The top of the Bollinger Band is 1480.71 and the lower edge is seen at 1393.46. The Market Profile 30 minute and daily charts tell us that the tails are at 1471.50 and 1462.05. We closed the session at the comfort level on the chart.
The 1% by 3box daily chart clearly gives us some upside targets. We see nothing but upside trendlines, not a downside line in sight. Clearly, we have a top at 1467.50 or so and that level needs to be removed to scare people into the long side of the trade. The 60 minute 1 by 3 box chart has an unfilled upside target of 1478 and a new downside target of 1452. We shall see which way the wind blows on this one but believe that we need some work on the downside or some backing and filling.

The NASDAQ 100 left a hangman candlestick on the chart as a result of the Friday session. We are above the Ichimoku Clouds for all time-frames reviewed. The stochastic indicator and the Thomas DeMark Expert indicator are both overbought and pointing higher. The RSI is flat near overbought levels and our own indicator is issuing a tentative buy-signal on the positive side of neutral. The 5-period exponential moving average is at 2683.47. The top of the Bollinger Band is at 2886.07 and the lower edge is seen at 2512.35. We see what looks to be a triple top with a gap below the market found at 2665 to 2711.25. This is the result of the New Year’s jolt to the upside. The Market Profile 30 minute chart shows resistance at 2744.25 where there are single prints, support is found at 2732.25. On the daily Market Profile chart the single print is just a click away to the upside at 2745.75. The daily 1% by 3 box point and figure chart has some upside targets the lowest being at 3010.97. We do see a downside trendline as well as several upside trendlines. We see an unfilled failed downside target. The 60 minute 0.1% by 3 box chart is really interesting insomuch as we see a triple top.

The Russell 2000 declined in the Friday session leaving a bearish looking candlestick on the chart. We have a 13 count on the daily chart. This is the only chart that has a 13 count. The stochastic indicator, the RSI and our own indicator have all issued a sell-signal. The Thomas DeMark Expert indicator continues to issue a buy-signal at overbought levels. The 5-period exponential moving average is at 875.80. The top of the Bollinger Band is at 892.59 and the lower edge is seen at 814.08. We are above the Ichimoku Clouds for all time-frames reviewed herein. When drawing a steep uptrend channel we find the upper edge at 890.88 and the lower edge at 864.31. Drawing a conventional trendline we find the trend at 841.21. On the daily Market Profile chart we see that 882.45 on the upside and 855.95 on the downside are the areas where the single prints can be found. These are areas of maximum instability. On the 30 minute chart the area of instability is 880 on the upside and 874.40 on the downside. The point and figure 1% by 3 daily chart continues to show upside potential. The 60 minute 1 by 3 box chart has a downside and an upside trendline and looks to be forming a pennant. We have unfilled upside targets and an unfilled downside target. This chart tells us that something will break. Should the trade continue to stay in-between these two lines, it could lead to a point of inflection and a violent move in one direction or the other. What we know is that it will be violent and should be respected.

Crude Oil left a doji candlestick on the chart as a result of the Friday trading session. The 5-period exponential moving average is 93.44. The top of the Bollinger Band is at 95.68 and the lower edge is seen at 85.97. We are above the Ichimoku Clouds for all time-frames. The price of crude broke slightly above the resistance level leading us to believe that there could have been some short covering or MIT orders causing the spike upward. The chart shows a rounding bottom with the trade about 61.8% of the way back to the recent high of 100.42, the recent high seen on September 14, 2012. If you would like to take the trade back to the all-time high, we have plenty of room to run to the upside. All of the indicators are curling over to the downside from less than overbought levels on the daily chart. The weekly chart shows the indicators on a continued buy-signal. The Market Profile chart shows that 94.10 could but an unstable are on the chart. The more difficult number will be seen at 92.65 which has been tested twice. On the daily chart, 94.40 and 91.20 are levels to watch. The point and figure 1% by 3 box daily chart looks as though it is forming a pennant. The 60 minute 1% by 3 box chart has a new upside target of 112.89. The price has moved above the downtrend line.

Gold remains below the downtrend line of 1678 but above the uptrend line at 1656.30. There is an upside channel with boundaries at 1679.58 and 1654.12. The RSI and the stochastic indicator are both issuing sell-signals from the neutral level. Should the market remain in this wedge, it will form a point of inflection on January 18, 2013. We are below the Ichimoku Clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The indicators on the weekly chart have just turned positive. The levels seen on the Market Profile chart are 1676 and 1653 on the 30 minute chart. On the daily Market Profile chart the levels are 1692 and 1624. The weekly chart is more bullish than the daily chart is.